The California Earthquake Authority (CEA) has elected to significantly upsize its latest catastrophe bond issue we can report, with its new Ursa Re II Ltd. (Series 2020-1) transaction now priced at $775 million in size, more than three times the initial amount of notes offered to investors.
The CEA returned to the catastrophe bond market in late September with this first deal from a new issuing vehicle, special purpose insurer Ursa Re II Ltd.
At launch to cat bond investors, the new deal from the CEA was marketed as seeing a seeking a $250 million source of fully collateralised earthquake reinsurance protection for the not-for-profit residential earthquake insurer for California.
But the CEA’s appetite for reinsurance in securitized form from the cat bond market is seemingly unaffected by the rising prices seen of late, as the insurer has now priced the deal at more than triple the initial size, with the Ursa Re II 2020-1 cat bond set to provide it with $775 million of collateralised earthquake reinsurance protection.
As we suspected when we announced the launch of this new deal, it will more than replace the $400 million of outstanding Ursa Re cat bonds that are due to mature in the fourth-quarter.
The CEA has $1.75 billion of catastrophe bond protection outstanding at this time, according to Artemis’ charts and data.
As this new Ursa Re II 2020 catastrophe bond is expected to now settle at $775 million in the next week, the CEA’s cat bond risk capital outstanding will increase to $2.525 billion for a time.
But the $400 million from its Ursa Re 2017-2 cat bond transaction matures in early December, so at that stage the CEA’s cat bond backed reinsurance limit will decline again to $2.125 billion.
Ursa Re II Ltd. will issue two tranches of notes that are being sold to investors and the proceeds used to collateralise underlying earthquake reinsurance agreements between Ursa Re II and the CEA, to provide the insurer with California earthquake reinsurance protection across a three-year term, on an annual aggregate and indemnity trigger basis.
Sources now tell us that the least risky Class AA tranche of notes, that were originally sized at $150 million, are now set to reach $425 million in size, while the Class D notes, that were originally $100 million in size, are now set to reach $350 million.
The now $425 million of Class AA notes, the less risky layer from this Ursa Re II 2020-1 cat bond issuance, which have an initial expected loss of 0.9%, were originally offered to ILS investors with price guidance in a range from 3.5% to 4%, but we’re told this settled at the mid-point of 3.75% in the end.
The now $350 million of Class D notes, which have an initial expected loss of 2.53%, were first offered to ILS investors with coupon guidance of 5.75% to 6.25%, but this has now settled at the top-end of guidance at 6.25%, we understand.
As a result, both tranches of notes offer attractive multiples to investors and represent an increase in pricing from other recent CEA sponsored catastrophe bond deals, which perhaps goes some way to explaining the strong appetite seen from investors for this new deal.
The upsizing of this deal is perhaps a sign of things to come as we move through the fourth-quarter and beyond.
With rising pricing of reinsurance and ILS, including catastrophe bonds, appetite for new deals from well-established and respected sponsors such as the CEA is likely to be high.
In particular the cat bond market seemingly has ample capital available to support new deals and cat bond funds are having some success with raising new funds from investors, which bodes well for helping sponsors to achieve their goals this year.
As a result, if conditions remain this way, we could see a very strong end to 2020 for the catastrophe bond market and this could also carry on into a strong first-quarter of 2021 as well.
The CEA will be delighted with the execution of this cat bond, at this time, in advance of its main reinsurance renewal. It locks in pricing over a three-year term and ensures the capital markets continue to play a growing role in its tower.
Positive for the sponsor and also the cat bond funds and investors backing the deal, this is a very strong start to Q4 issuance.
Issuance of this new $775 million Ursa Re II Ltd. (Series 2020-1) catastrophe bond issuance from the California Earthquake Authority (CEA) is set to complete at the end of next week, we understand.
You can read all about this new transaction and every other catastrophe bond issued in the Artemis Deal Directory.
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